In two months, the U.S. will face the need to increase its borrowing limit. Additionally, the delayed $110 billion in spending cuts will again kick in.

“This could be a bloody fight,” says Chris Krueger, a senior political analyst at Guggenheim Partners’ Washington Research Group. Mr. Krueger said the U.S. government now has a one-in-five chance of defaulting on its debt.

He boosted those odds after watching what transpired during the contentious fiscal-cliff squabbling.

“The next fiscal cliff is going to be more toxic and could end with an almost unthinkable conclusion: a technical default on the U.S. debt,” Mr. Krueger says. “We are raising our odds of a debt default from 10% to 20%. This is largely due to the brinkmanship and regained leverage that Republicans will have on the second fiscal cliff.”

That’s why investors are preparing for the new year to kick off much like how 2012 came to a close; more volatility appears to be in store. The Dow dropped in six of the last eight trading sessions of 2012, including two straight triple-digit point moves (one down, one up) to finish the year.

“In the end I don’t see the deal doing much good for the markets,” says Peter Tchir, founder of New York-based TF Market Advisors. “We may get some wild gyrations in the next few days as the markets digest what was done versus what was priced in.”

Mr. Tchir said investors should view any potential short-term rally with skepticism. “I certainly think the market can attempt another rally, but at this stage think that is more of a selling opportunity than one that needs to be chased,” Mr. Tchir says.

The question now is whether the rally has more room to climb amid word that the deal is official. The Dow jumped 166 points on Monday as optimism over an agreement gained momentum.

A “buy-the-rumor, sell-the-news” scenario wouldn’t be a total shock.

“We doubt the marketplace can sustain the gains in stocks late Monday and the selloff in bonds,” says Andrew Brenner, global head of international fixed income at National Alliance Securities. He says the contentious debates in Washington will likely lead to another downgrade of the U.S. credit rating at some point this year, which could spark another wave of volatility.

Nevertheless, any cheering from Tuesday night’s cliff deal could inevitably give way to worries about the debt ceiling, a phenomenon that will likely attract much more attention now and in the coming weeks.

“This is where things get very, very interesting,” says Dan Greenhaus, chief global strategist at BTIG LLC, a New York brokerage firm. “We believe the debt ceiling debate is going to be another fiasco.”

Morning MarketBeat Daily Factoid: On this day in 2008, crude-oil prices jumped above $100 a barrel for the first time ever.

-Steven Russolillo

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Stocks to Watch

The U.S. Justice Department has declined to prosecute Bridgepoint Education after receiving a complaint the for-profit educator broke federal rules in the compensation of its admissions personnel, the company said in a regulatory filing.

Irving Azoff, the executive chairman of Live Nation Entertainment, resigned on Monday from the concert promotion giant.

Middleby has acquired Viking Range for $380 million in cash, a move that allows the food service equipment maker to expand in the residential sector.

“Congress broke a rancorous stalemate Tuesday to pass legislation designed to avert the so-called fiscal cliff. But the compromise bill, which blocked most impending tax increases and postponed spending cuts largely by raising taxes on upper-income Americans, left a host of issues unresolved and guaranteed continued budget clashes between the parties.”

“Whether investors’ continued search for yield is the right strategy or just the first step toward inflating another painful bubble will depend on two factors: the direction of the economy and the price of different assets.”

“Emerging markets and U.S. software and housing stocks powered a jump in fourth-quarter initial public offerings, but it wasn’t enough to stave off a decline in activity compared with the previous year.”

“The “Dogs of the Dow” didn’t have the same bark in 2012. After two consecutive years of beating the market, one of Wall Street’s classic strategies didn’t prove so fortuitous last year, sparking questions over whether the approach will rebound in 2013.”

“Since the financial crisis, investors have done just fine avoiding stocks in favor of bonds. But the days of stellar fixed-income returns might be a thing of the past, strategists said, and investors will have to consider heading back into stocks in 2013.”

“Despite a few outsize performers, hedge funds lagged behind broader markets for the fourth straight year in a row, the longest period of underperformance since 1995 to 1998, according to industry tracker HFR.”

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